IME plans to launch financial tools on agro products

TEHRAN, Feb. 27 (MNA) – Iran Mercantile Exchange (IME) has proposed options contracts as the model to manage risk of trading in agricultural products market.

According to a report by IME international affairs and PR, Hamed Soltaninejad, CEO of IME said in Iran's 5th National Conference of Financial Engineering, which was held in Management Faculty of Tehran University, that as the agricultural sector carries a lot of weight in sustainable development of economies, IME has the plans to launch financial tools on agro-products. He added that options contracts are a market-based solution which reflect all the costs of supporting the agricultural sector.

He went on elaborating on the proposed model and said it’s a scheme of derivatives contracts with income insurance which will help the government reduce its expenses. “In options contracts the buyer has the right, but not the obligation, to buy (call) a security or other underlying asset an agreed-upon price (the strike price) on a specific date (exercise date); with the exchange, of course, receiving collaterals,” Soltanined added. He explained that implementing options contracts on agro-products means that we can offer each farmer a put (sell) option two or three months before harvest time at which it is possible to estimate his or her crop yield; giving the farmer a choice to sell his or her product to the government or whichever entity that underwrites these securities.

He also said that the other potential of this model the government can pay the price of these contracts as subsidies. He noted that key point here is that we can estimate the farmer's crop yield and offer him the put option accordingly, with the whole price or part of it paid to them as subsidies. He continues that all governments keep part of the agricultural products under their ownership as deposited in warehouses and puts the remaining options out to tender so that eligible purchasers including bakers or flour producers or other relevant industries, who can receive the products from farmers, can buy them.

 IME CEO also said that these securities can be sold on the secondary market, which means that the capital market appreciates the value of the support the government has for the agricultural sector; this leads to reductions in marginal costs and will alleviate the problem of agricultural products being sold to middlemen at very low prices.

Pointing to the high potentials of our economy for expansion of derivatives market, Soltaninejad asserted the value of derivatives trades surpassed that of the spot market on IME this year; 11.5 billion dollars and 11 billion dollars respectively.

 Paying attention to America's economy, he said, we will see that there are to massive pillars carrying the country on their shoulders: the military and the agriculture. The second one is by no means less important the first. There have always been ups and downs in this industry and all the governments put aside a share of their budget as subsidiaries for it.

Referring to the risks that geography, weather conditions and precipitation rates that are exposed to agricultural sector, this industry has always been based on as structure of small ownership and that's why it needs support. He continues that America's policy to support its agricultural sector in 1930's to 1960's, like that of Iran in currently, was purchase-oriented. In Iran each year the government specifies a great amount of the yearly budget to buying agro-products based on a purchase-guarantee policy. According to official statistics, Iran spent 15,000 billion IRR on buying wheat from framers, which is half the total civil budget of the country. Experience tells us that the guaranteed purchase plan is not an efficient policy and we need to replace it with market-oriented ones. He added that America changed its policies in this regard in 1996 and moved towards policies which were based on market fundamentals. The same story goes for EU with integrated policies on the agenda for this sector from 1960 and from 1980 on, on account of the increase in amount of crop yields, subsidies were focused on exports.

IME CED went on to say that Brazil as one the countries with the most advanced solutions with regards to its agricultural sector has implemented certificates of depositary receipt on agro-products. Instead of guaranteed purchase policy, Brazil employed the guaranteed price policy at which the farmer could sell their product with a minimum guaranteed profit. In 1990 they went ahead with a plan based on which farmers could store their products in warehouses and receive a warehouse receipt based on the deposited product, which is a solution to securitize financial tools. Soltaninejad added that farmers could receive loans based on these securities which were tradable on the secondary market. Later on in 1997, Brazilians implemented market-oriented policies and moved towards free-price strategies as well as an insurance program for farmer's products or part of their income.

In his address Soltaninejad also talked about Costa Rica and Mexico and said that their policies are export-oriented and the government, especially in Costa Rica, pay subsidies for a product like coffee and will compensate for their loss. He added that the policies in Mexico are like the ones employed in Chicago Mercantile Exchange, based on which farmers are offered sell positions at appropriate times and the government provides them with money they need for that.

In Iran, IME CEO continued, there have been different approaches toward the issue; before the Islamic revolution from 1350 Hijri year the government forced market participants to buy the agro-products at a prices determined by the government. From 1368 Higri year we experienced a shift towards guaranteed purchase plan and in 1389 Higri year, the Iranian parliament passed the law of Increasing Efficiency of the Agricultural Sector, which in its Article 33, that went into effect, in 1394 Hijri year, it is stipulate that the government will not buy the product from the farmer. Instead it prepares the ground for the farmer to sell their product in within a market-based structure. In case the product is sold at a lower price that what the government has previously guaranteed, the remaining value will be delivered to their account.

He also mentioned that IME has experienced to big events this year which are implementing guaranteed price plan for Maze and feed barley, hoping that IME would be able to extent this policy to other products as well. This way he said the government would not have to tolerate the marginal costs of warehousing, transportation, etc.

Finally, IME CEO said that IME would welcome all the experts on financial engineering sector to offer their new solutions to expand financial tools usage in Iran's capital market.


News Code 123874


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